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Page 9: Buy-To-Let.

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This is the page where we discuss Buy-To-Let: the idea that you buy a home separate to your main residence for the purposes of renting out and making money on it.

How does it differ from conventional mortgage deals? What are the risks? What is the likelihood, this year, that buy-to-let is a viable investment?

Please read on.


Becoming a private landlord should not be seen as an easy way of making easy money. It can be riskier and more complicated. It can also be very time consuming, more than most forms of investment, and there is no guarantee that house prices will continue to rise. That said, having a second property to let to tenants could reap considerable financial rewards over time.

When choosing a property to let it is wise to take advice from local letting agents to determine what type of properties are in need and in which parts of the town is best or most wanted. They can tell you if there is a University in the town, and if students are looking for somewhere to live. The Association of Residential Letting Agents (ARLA) state that a property needs to be in the right area, close to transport and other facilities, and in good condition.

When choosing a letting agent to act on your behalf it is very sensible to choose one that is a member of the ARLA because all members of the ARLA must join in a bonding scheme to protect rent and tenant's deposits. The bond provides total compensation of up to £2 million a year. There are a number of tax issues that need to be looked at in order to maximise your tax position, such as being able to offset your maintenance costs, letting agent fees etc as well as any interest paid on a buy to let mortgage against your tax.
You can visit the ARLA website at for further information on becoming a private landlord.

Please read on.

The Buy-to-Let Mortgage

When buying a second property to let you will need to decide whether your primary objective is income or capital growth. In other words, are you looking to make a profit month on month or are you looking to make a profit through increased equity from the second property as it increases in value over time? The decision may affect the type of property you purchase, and the location. A letting agent can advise, for your particular geographic area.

Buy-to-Let mortgages are different from standard owner-occupier loans in 3 distinct ways:

Rent Potential - the decision as to whether or not a mortgage will be offered is usually based on the rent you will earn as well as your income. In some cases your income is not ever considered.

Higher Interest Rate - buy to let mortgages have slightly higher interest rates.

Larger Deposit - typically a minimum of 20% or 25% of the property's value is required as a deposit.

Mortgages on property to let have attracted higher rates of interest than the standard mortgages offered to owner-occupiers. In addition, until now, rental income has usually been disallowed when assessing a borrower's ability to meet mortgage payments. The current consensus is that private rented sector growth must be encouraged, for not only does it lag well behind the private rental sectors of all the other advanced economies, the lack of choice between renting and buying is, in fact, bad for the economy and a contributory factor to the booms and busts of the housing market over the last decades.

The change in lending criteria and the lowering of interest rates for private investors has only been made possible by the strong presence of professional, bonded letting agents in the lettings market. Gross returns, i.e. the rent received before taking account of the cost of letting such as management fees, maintenance, service charges ground rents and insurance, varies between 7% and 10%. This can be less for very expensive properties.The average rental return in Britain today hovers around the 10% mark, and capital appreciation is likely to match, if not exceed, inflation for the foreseeable future. As a rule of thumb, the gross rents should be between 130% and 150% of the monthly mortgage payments.

Buying a property to let is not the same as buying your own home. Mortgage lenders will want to know that an ARLA member agent has been advising on the selection of properties suitable for letting. The experienced agent will know the local market, whether there is a demand for say, two-bedroomed flats, or four bedroomed houses, or for properties close to schools or transport links or secluded properties with gardens. Also the agent will know the standard of decoration, furnishing, fixtures and fittings required. Then there is the selection of well-covenanted tenants who will pay their rent on time and leave the property on time and in a proper state, plus the tenancy has to be managed at all times. Knowing that the management of any inherent risk is in the hands of a professional agent enhances the creditworthiness of Buy-to-Let propositions put to mortgage lenders.

Please read on.

The Buy-to-Let Initiative

Broadly, there is little difference between arranging a Buy-to-Let mortgage for investor landlordís and a standard mortgage for owner-occupation. Buy-to-Let mortgages are subject to the usual status checks. Loans can be arranged for terms of between five and 45 years and for up to 80% of the value of the property. Through the Buy-to-Let initiative, rents achievable from an investment property can be taken into account, provided an ARLA member agent is to be responsible for letting and managing the property.

Please read on.

Finding the Right Property

Armed with suitable advice from an ARLA letting agent, Buy-to-Let investors can start on a property search; or a letting agent may do this for them, instruct their own sales department or work regularly with the best estate agents in their area. Once a property has been found, the letting agent will confirm whether or not it has letting potential, the range of the likely rent that can be achieved in current local market conditions and advise on the need, for re-decoration and new fixtures and fittings to attract good tenants and to reduce the risk of lengthy void (empty) periods.

Please read on.

Budget for Costs

When you manage a property there are many costs involved in addition to the monthly mortgage repayments. As a guide, you should be aiming to achieve a gross rent of about 135% of the rental property's interest only mortgage repayments in order to cover your costs should anything go wrong.

These additional costs include:

    • Maintenance costs for the property.
    • The cost of maintaining gas and electric appliances and ensuring they comply with any regulations such as safety tests.
    • Letting agents charge a fee of around 10% of the monthly rent for finding and vetting tenants with an additional cost of around 5% if you require a full management service.
    • Building and contents insurance for the items provided as part of the rental agreement.
    • The cost of any furniture. If the property is to be let furnished, make sure you are covered for this by your home insurance.
    • Ground rent or service charges, applicable to leasehold properties.
    • The property may require decoration work ranging from painting, to a new bathroom suite before it is suitable for letting to tenants.
    • Legal insurance to cover costs from evicting tenants in the event of non-payment, very important, as this can be very expensive.

Please read on.

Golden Rules

DO think of buying to let as a medium to long term investment.
DO Seek advice from an ARLA letting agent on local market demands.
DO Get your sums right. Will the rent cover borrowings and costs, after allowing for void periods?
DO Decorate, fit out and furnish to high quality standards, especially kitchens and bathrooms, to attract the best tenants and let quickly every time.
DO Use an ARLA member as your letting agent. They are bonded, hold Professional Indemnity Insurance to required standards, have staff trained to ARLA's competency standards and are kept up to date with the latest legal and regulatory requirements. DON'TLet personal taste cloud your judgement. Be sure the property you choose meets market requirements.
DON'T Purchase anything with potential maintenance problems like a lot of woodwork or large gardens. It will add nothing to the rental value and cost a lot to keep up.
DON'T Think that the running of an investment property to let can be left to friends or relatives in your absence. Tenants require a full management service.
DON'T Use off-the-shelf tenancy agreements from HMSO or law stationers, or forget to issue the right notices or fail to have a proper inventory and condition report made before a tenant moves in. Leave all documentation to a professional agent.
DON'T Furnish with second hand furniture or cast-off soft furnishings. These will probably contravene the Furniture and Furnishing Regulations.

After the Purchase

An ARLA member will introduce and vet prospective tenants; prepare the tenancy agreements; advise on and arrange inventory and condition reports and changes to utility accounts and Council Tax; collect the rent and pay the balances to the landlord's account. A letting and property management agent can also pay bills on behalf of the landlord and regularly inspects the property, recommending, overseeing and accounting for necessary maintenance, repair and re-decoration.

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Special Conditions

Generally, lenders will expect landlords to use an ARLA member to let and manage the property and for rental agreements to be drawn up as Assured Shorthold Tenancies or other contracts as appropriate. Insurance cover is now available for rental protection, in the event of a defaulting tenant, and for legal expenses in addition to the normal building and contents insurance. What other costs should be taken into account? Letting agent's commission and management fees, Insurance (Building/Contents/Rental and Legal Expenses Cover), the costs of keeping the property in a marketable condition, service charges and ground rents - if a leasehold. (The tenant is responsible for such items as utility accounts, Council Tax and TV licence fee etc.)

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Tax benefits

Deductions against tax on rents received may be claimed for the costs of maintenance, such as insurance, cleaning, gardening, agent's commission and other reasonable management expenses (but not improvements). The initial cost of furniture fittings and fixtures is not allowable, but the actual cost of subsequent replacement may be claimed; or, alternatively, a wear and tear allowance of 10% of the rents received may be deductible.

Note: This page is for guidance only. The responsibility for the financial decision to Buy-to-Let can only rest with the investor. Most letting agents will not accept responsibility for the validity of investments, costs incurred or for mortgage arrangements made, although those who are also registered as financial advisers may do otherwise. It should be noted that as with any investment, returns and capital values can go down as well as up; and the investor should be fully aware of the terms and conditions applied by the chosen mortgage lender. Letting agents must present their own written terms of business for letting and managing properties.

Please read on.

Home Rental Income Slumps

(Thursday 6th June 2002 news story)

Average property rents have fallen to their lowest level for more than two years as buy-to-let properties have flooded on to the market, a report claimed today. The Royal Institution of Chartered Surveyors (RICS) warned people thinking of buying an investment property that there were now too many landlords chasing too few tenants. It said rental levels had fallen steadily since October 2000, and this - combined with increased property prices - had pushed down gross yields for landlords for the sixth consecutive quarter.

Two weeks ago, a survey revealed that London in particular was suffering from the effects of a slump in demand. Today, the RICS said average gross yields had now fallen below the level at which most landlords would be able to make a profit. RICS lettings market spokesman Jeremy Leaf said: "The lettings market is saturated with properties as a result of the rush to invest in buy-to-let properties. There are too many landlords chasing too few tenants, driving rents down to a level where making a profit is difficult. There will be many investors who are disappointed that buy-to-let has not lived up to their expectations." "We would advise anyone considering entering the buy-to-let market at the moment to take professional advice before going any further, or even delay until market conditions improve."

During the three months to the end of April there was a slight increase in demand, with 12% more surveyors reporting a rise in demand compared with those reporting a fall - although this was down from 31% during the same period last year.

Only 8% of surveyors expect rents to rise, confirming the depressed nature of the market, while yields are also expected to remain under pressure. Private landlords have the largest share of the market, accounting for 86%, followed by institutional landlords at 10%. The proportion of private tenants in rented accommodation increased by one percentage point during the three months to 83%, while the number of social tenants rose by 3% to account for 6% of all tenants. But the level of corporate lets fell 3% to 9%, and the number of students remained the same at 3%. RICS said there was stronger demand for rented accommodation in the North, Midlands and Wales, but in London surveyors reported a sharp drop in tenants.

Here at Surgery HQ, some patients have let us know that they were were eager to invest in the fizzing property market. We were quick to caution them. The property market is full of buy-to-let investors dismayed with shares and savings account interest rates but with spare cash because their mortgage interest payments are at record low levels and their own homes have risen in value. Rule number 23: Never invest with the crowd.

We can't predict the future at Money Surgery but we are always warning people to prepare for the worst. We have expected a fall in property prices for some time now. Across the UK, they are 20 - 40 percent above the long term trend. Either they will drop in the short term or stall and wait for the long term trend to catch up. And from here on in, interest rates can only go one way. Be careful not to borrow too much. This site is dedicated to eliminating debt. That's why we're here.

Buy-to-let Gone to Seed?

(Wednesday 1st May 2002 news story)

Serious warnings that the buy-to-let market has overheated will be issued by property experts next week.

The Royal Institution of Chartered Surveyors (RICS) will warn investors of the dangers of committing to buying a second home and renting it out.

The RICS reports an "explosion" of buy-to-let investors, resulting in too many landlords chasing too few tenants, which is now pushing down rents. The income produced on rented homes has now fallen for the fifth quarter in a row, leaving many people with a shortfall on their new mortgages.

At the same time, Nationwide reports house prices have risen by a record 3.4% last month. While this is good news for those who already own investment property, it could make it harder for new buyers, who will need bigger mortgages, to cover their repayments with rental income. RICS figures show London has been hit the hardest, with more than 80% of agents reporting a drop in lettings, against fewer than 20% reporting a rise.

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